Opinion

The Great Debate

When hedge funds lose their mojo, humble pie is in order

June 9, 2009

pie– Matthew Goldstein is a Reuters columnist. The views expressed are his own –

We’re not quite there yet, but hedge fund managers may soon need to start giving away toasters – or perhaps plasma TVs — to woo new investors. Forcing the funds to eat a little humble pie now would benefit hedge fund investors in the long run.

Most hedge funds are off to a decent start this year — the average return to date is 9.43 percent, says Hedge Fund Research. Yet it’s a particularly tough time for launching a new fund. In the first five months of 2009, just 40 new funds have begun reporting performance figures, BarclayHedge reports.

That’s a pittance compared with the same time last year, when 240 new funds started trading.

And investors, who were badly burned last year, seem more interested in pulling money out of hedge funds. This year the pace of redemptions is down only slightly from the fourth-quarter of 2008 — when investors pulled some $165 billion out of hedge funds.

Look for redemptions to continue well into the summer, as temporary “gates” that blocked investors from fleeing for the exits, start to get lifted at some big funds.

Sol Waksman, BarclayHedge’s president, says it will probably take “some period of sustained positive performance” before investors are willing to commit money to new funds.

But it may take more than a few “up” months for the hedge fund industry to get its mojo back.

So-called funds of hedge funds, big pools of investor capital which direct money to an array of funds, are fast disappearing.

The incredible shrinkage of funds of funds, which once accounted for 43 percent of all the money raised by hedge funds, means fewer places for managers to turn to for raising money.

Banks, meanwhile, continue to clamp down on financing for hedge funds.

After the easy credit of the last decade — when starting a hedge fund was nearly as easy as opening a lemonade stand — a period of anemic growth should be welcome.

As managers go begging for money, investors will get a lot more leverage in negotiating deals on the managers’ fees that had once been considered sacrosanct: the 2 percent asset management fee and the 20 percent cut of the profits.

Investors should also seek their freedom from capital lockup requirements. Forcing investors to lock up their money for anything longer than a quarter at a time only makes sense for strategies that take a while to generate results, such as a fund that invests in distressed assets or agitates for management shakeups.

Investors stand to gain if the great hedge fund debacle of 2008 leads to a lasting rollback in hedge fund fees and culture that has emboldened managers to do as they please.

Comments
3 comments so far | RSS Comments RSS

World War II saw Wall Street provide barely 15% of the needed capital for the war effort. We prosecuted that war to a successful conclusion. Global climate change is an even greater threat to mankind than was the great conflagration. Surely we can draw from our experiences of the 1930s and 40s to find away to mobilize our workforce to meet this threat.

Posted by Anubis | Report as abusive
 

It seems like a good time to launch a fund-of-funds replication strategy fund. The cost basis would be much less since the investors would not be paying the high fees. And there would be far more transparency and liquidity.

Posted by Steve | Report as abusive
 

Less than 1% of all hedge funds are worth looking at to invest. There are now abut 7-8000 funds where most have large volatility and have not controlled risk like they should have, nor do they show consistency of profits. There are only a few very elite managers that make money year after year as they have a very good shop with many expereinced anaylsts people that have traded in difficult markets. Today anyone who has an MBA thinks they can run a hedge fund. They have had a huge rude awakening gthis past year. Invstors no matter how they are should do their homework, and do not rely on other opinions. Due yourown due diligence, subscribe to databases and do not invest with thir party marketers who will pitch fund that pay them a fee. Stay away from fund of funds as they have double fees and are an excercize in mediocrity. Pay attentionto fund that have high Sharpe ratios over a minimun of 1.5. do not go with a manager under a 5 year track record no matter how good the short term record looks.

Posted by Alan | Report as abusive
 

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